How to Challenge a Negative Net Worth Affidavit Part I: The Procedure | Butler Snow LLP
You’ve got a monetary judgment and your client can’t wait to get paid. The judgment debtor files a notice of appeal and an affidavit stating that he has negative equity. The judgment debtor argues that he has the right to replace the judgment without security.
This article is the first of a two-part document explaining the procedure for challenging a negative net worth affidavit and offering a case study for successfully following this procedure.
Replacement methods in general
The filing of a notice of appeal does not generally prevent the execution of a judgment. To avoid enforcement while awaiting appeal, a judgment debtor must set aside the judgment by posting security.
The judgment debtor can avoid enforcement of the judgment by (1) filing a written stay of enforcement agreement; (2) filing a replacement bond (the most common approach); (3) deposit money with the clerk of the court of first instance instead of a bond; or (4) provide an alternative court-ordered guarantee. Tex. R. App. P. 24.1.
Replacement by affidavit
In 2003, the Texas legislature made it easier for judgment debtors to appeal a pecuniary judgment by imposing alternative limits. The amount of the judgment security must not exceed the lesser of 50 percent of the judgment debtor’s equity or $ 25 million. Tex. R. App. P. 24.2 (a) and (c). The rule does not define “equity”, but some cases define it as total assets less total liabilities, determined in accordance with generally accepted accounting principles (GAAP).
A judgment debtor who wishes to substitute for equity must file an affidavit stating “full and detailed information regarding the assets and liabilities of the debtor from which net worth can be determined.” Tex. R. App. P. 24.2 (c) (1). An affidavit that meets these requirements constitutes prima facie evidence of the debtor’s equity for the purposes of establishing the amount of collateral required to replace the judgment. Username.
The courts have concluded that a judgment debtor who can swear on negative equity does not need to post any security to prevent performance. This scheme therefore encourages a judgment debtor to be creative and file a negative net worth affidavit to maintain the status quo during the appeal.
Affidavit challenge procedure
A judgment creditor can dispute the debtor’s equity and make a discovery. Tex. R. App. P. 24.2 (c) (2). The competition does not need to be sworn. Username.
A preliminary question to consider in a contest is whether the Net Worth Affidavit provides the required level of detail, but most contests will require an evidentiary hearing. When hearing a dispute of the equity claimed by the judgment debtor, the judgment debtor has the burden of proof. Tex. R. App. P. 24.2 (c) (3).
Rule 24.2 (c) requires the trial court “to make an order indicating the debtor’s equity and in particular setting out the factual basis for that determination”. Tex. R. App. 24.2 (c) (3). But the trial court has the discretion to consider whether the assets and liabilities claimed by the judgment debtor are correct in light of all the evidence.
Some decisions have held that the court of first instance does not need to determine a specific net worth amount if it finds that the judgment debtor has not fulfilled its obligation to prove net worth. In this situation, the court of first instance may set the bond under the general rule requiring judgment debtors to post a bond, deposit or security equivalent to the sum of the compensatory damages awarded in the judgment, interest for the estimated duration of the appeal and the costs awarded in the judgment.
In Part II, I will provide a roadmap for successfully challenging a negative equity affidavit and forcing the judgment debtor to post security or face enforcement of judgment pending appeal.